Crossover

They LOOK, THINK, AND ACT like entrepreneurs. But they're going where entrepreneurs have never gone before

Melissa Bradley was only 23 years old when the consulting company she started just one year out of college booked its first $1-million year. But unlike many other young masters of the universe, when Bradley sold the business a few years later, in 1992, she didn't put the proceeds into a monochromatic condo or speculative stocks. Instead, she used the money to launch The Entrepreneurial Development Institute (TEDI), an organization in Washington, D.C., that teaches entrepreneurship to at-risk youths. "If I could do it, I figured they could, too," says Bradley, who, despite having grown up in a poor, single-parent household, graduated from Georgetown University and later earned an M.B.A.

"I envisioned starting TEDI as a for-pay service, but the kids I wanted to help couldn't afford it," says Bradley, now 29. So she rewrote her business plan and launched TEDI as a nonprofit--in spite of, she says, having "no clue" about how to run one. "I was thinking, 'What's a 501(c)(3)?" she recalls. "I couldn't understand why we didn't pay taxes. As a businessperson, I still think that's dumb," she says. Nor did she understand why some funding sources wanted her to start programs that didn't meet her clients' needs or why so many nonprofits seemed "bogged down in process." To learn basic tax-and-filing issues, Bradley went to nonprofit-related seminars. But when it came to other decisions, she decided to run TEDI like a regular business.

Melissa Bradley isn't the only one. Increasingly, entrepreneurially minded nonprofit leaders are bringing the tactics of the private sector to the task of solving social problems. And with good cause: they need the cash.

Federal and state funding for nonprofits dropped by 23% during the 1980s, and it continues to decline. Similarly, corporate and individual giving has decreased, while social needs are on the rise. "The nonprofit sector is under a lot of pressure," says Jerr Boschee, who directs the Minneapolis-based National Center for Social Entrepreneurs. "Costs are going up, resources are going down, and now we have people in need who weren't around in the 1970s and '80s: crack addicts, people with AIDS, the homeless, the spousally abused."

Consequently, all nonprofits are faced with trying to cure greater ills with even less money--or to find new ways to generate revenue and become less dependent on foundation and government grants. Some nonprofits are even starting and running small, profit-seeking companies, channeling their earnings back into social-services programs. Many others are adopting private-sector management techniques in an attempt to get more mileage out of whatever resources they have. Either way, the new "social entrepreneurs" are creating hybrid businesses that blur traditional sector lines and uncover startling uses for marketplace power.

Already, several networks have sprung up to study and replicate this relatively new phenomenon. Bill Shore, director of Share Our Strength--an antihunger organization based in Washington, D.C., best known for its successful "cause marketing" and partnership with American Express--has begun to convene leaders from what he calls "community wealth enterprises." In the meantime, Stanford University's Graduate School of Business hosted a conference this spring on social entrepreneurship and is planning to integrate its findings into an ongoing curriculum. The Roberts Foundation, in California, recently published a book of case studies called The New Social Entrepreneurs. And in Minneapolis, the National Center for Social Entrepreneurs has been working for more than 10 years with nonprofits that want to run profit-generating businesses and operate more entrepreneurially.

Adding velocity to all this change is another factor: more than ever, there seems to be little difference between the kind of new-generation founders of nonprofit organizations and the founders of ambitious growth companies. The same people who are fashioning the hybrid social enterprise might as likely have been for-profit entrepreneurs. Bradley, of course, actually was a traditional entrepreneur. Little wonder, then, that the once-impregnable barriers between businesses and charities are now a lot more porous.

"At least half the nonprofit executives in this country now understand that they have to do something different," says Boschee. "Probably the best 2% to 3% of them understand what needs to be done and have the guts to actually try it."

Exactly what are they trying? The managerial challenges posed by a traditional nonprofit are tough. How have these new socially conscious entrepreneurial managers worked to overcome them? What changes have resulted?

New sources of revenue: For one thing, by seeking nontraditional ways of earning income--such as running a business or developing a corporate partnership--a nonprofit entity becomes less dependent on mercurial sources of funding, such as government grants or individual donations, and replaces them with a stream of income that has at least a chance of achieving self-sustaining momentum. San Francisco's Juma Ventures grosses $900,000 in annual sales, enough to run its social programs, including job training for high-risk youths.

Borrowing a concept from the corporate sector, Bradley is planning to issue "community stock" in TEDI as a new way of raising money, capitalist-style. "We'll give people stock certificates, and their money will go into a pool that provides funding for a young entrepreneur. Shareholders will vote on how the money is spent, much as they would in a company," she says.

Changing attitude toward profits: At the heart of the funding shift is a change in the way nonprofits have traditionally viewed money and the way they've valued their own assets. "Finally, people are realizing that we have to rethink not how to raise money but how to make use of the resources in our communities," says Jed Emerson, author of the Roberts Foundation's case-study book. "People are talking not about charitable contributions but about how to bring added economic value to the interaction between nonprofits and the communities in which they work."

But such a shift in perspective doesn't come quickly or easily. Many nonprofit entrepreneurs speak of the culture clash between their own wish to make a profit (to provide more services) and the distrust of money typically felt at nonprofits. Listen to Gary Mulhair, who now runs Pioneer Human Services, in Seattle--a network of hotels, restaurants, and other businesses operating under the umbrella of a nonprofit that works with at-risk populations. "The single biggest issue for us is that not everyone finds working in the bottom-line atmosphere natural," Mulhair says. "Some people don't understand how to run a business profitably and, in any case, think that in the business of helping people, you shouldn't be influenced by the bottom line."

Greater accountability to clients: Nonprofits that do manage to generate earned income gain greater independence from the demands of funding sources, ultimately enabling them to be more accountable to the people they serve. "One foundation tried to get us to change our mission because it didn't think we were serving our clients in the best way," says Bradley. "I said, 'Have you asked my clients what they want?' They said, 'No, but this is the theory about helping a disadvantaged population." After market research disproved the foundation's theory, Bradley turned down the funding. In the for-profit world, she says, you conduct client surveys and market research, and eventually put your offerings to the test of the market itself. "But in the nonprofit world, if your clients don't complain, it's like everything is OK."

Some nonprofits go so far as to gauge their services by actual market demand. "The only way we get money is if people are willing to pay for something," says Sharon Helfant, deputy director of Denver-based Osage Initiatives, a nonprofit that owns a custom-assembly business providing employment for the homeless and otherwise economically disadvantaged. "We're not giving our services away for free. There has to be a need for them, a market. A lot of nonprofits--or foundations, or the government--decide internally that there's a need, but that's a different threshold than the market," she says.

A focus on outcomes: For social entrepreneurs, market-based thinking has also created a greater focus on the organization's results than on its processes. "Before, we were like all the other social-service agencies; we looked less at outcomes and more at process," says Rick Aubry, executive director of Rubicon Programs Inc., a nonprofit in California that provides training services and jobs to a number of disadvantaged client groups, along with running several profit-generating businesses. "We'd ask, 'How many people walked in the door?' instead of 'How many people are better off from having walked in the door?"

There are other benefits of focusing on outcomes: It helps depoliticize social-services organizations by substituting concrete measurements for subjective interpretations. It also provides clear goals against which employees can measure their progress and accomplishments, a psychological blessing in a line of work that to employees often feels like shoveling sand uphill.

Less exploitation of "the cause": Unlike their "socially responsible" business cousins, like Ben & Jerry's, many nonprofit entrepreneurs insist that their product or service be competitive in the marketplace without the benefit of so-called cause marketing, or playing on public sympathies to boost sales. "We could make our sales go up if we talked more about the work we do with teen mothers in poverty," says Diane Flannery, who heads Juma Ventures, a San Francisco nonprofit that offers counseling, job training, and work experiences to homeless and low-income youths by running several small profit-making companies. "But we don't want to talk about our employees that way." Juma wants its employees to know that they've earned their customers' business, not wonder if customers are motivated by charity or pity.

From a competitive point of view, relying too heavily on cause-marketing tactics can also undermine long-term sales results. "People buy based on quality, service, and price," says Aubry, who shuns cause marketing. "Pragmatically, cause marketing won't make your product last in the marketplace. It might get bought once, but not again. It also undermines the point of the organization. As long as managers and staff are here to make a great product, not sell a sentimental story, they'll feel better about themselves and won't feel personally exploited."

Less fear of failure: "I'm a big fan of failure," says the Roberts Foundation's Emerson, who approaches funding nonprofits more like a venture capitalist than a typical foundation officer. "People involved in funding start-ups will tell you that out of every 10 launches, they'll get two really successful efforts, two that are complete failures, and the rest in the middle--the walking wounded. When a for-profit fails, it's viewed as a learning experience, an investment in intellectual capital. But when a nonprofit manager fails? It scars the person for life. We try to help the nonprofits adopt the private sector's attitude."

The biggest net effect of the for-profit influences, says TEDI's Bradley, is to reverse the flow of accountability that the nonprofit world has grown used to. In traditional nonprofits, it was the funding organizations that had to be satisfied first, then the executive director (usually the conduit to funding sources), then the employees and volunteers, and, only in the end, the people whose satisfaction was directly tied to the organization's mission in the first place. But with no one measuring the outcomes that an organization produced--a substitute bottom line gauging the nonprofit's effectiveness in the absence of a traditional cash-flow report--who could tell whether the real clients were being well served? Now, as the new social entrepreneurs redirect the focus to clients, people can.

And You Think You've Got It Bad? A glossary of the nonprofit world

Assets: Include certain activities nonprofits can do that they can charge for, such as managing community-service events for a company's employees or associating the nonprofit's name with a corporate partner.

At-risk clients: People, usually adolescent or younger, whose circumstances make them especially vulnerable to destructive social and societal influences.

Cause marketing: The selling of a product or service based on its link to a laudable social-service project.

Clients: Companies or people who for-profit managers think of as customers, except that clients don't pay for services.

Crucifixion complex: The feeling among many nonprofit workers that total self-sacrifice is the only morally defensible choice. This breeds monumental employee burnout.

Double bottom line: Includes budget results and mission-related results (whether the organization is accomplishing its aims).

Executive director: Usually the organization's leader. He or she is often revered, sometimes reviled, and almost always feared for being the sole pillar upon which the organization stands.

Infallible leader: See executive director.

Grant: The nonprofit term for capital. Money raised in the form of handouts.

Labor-cost premium: Unusually high training and absenteeism costs incurred by social-service organizations that aim to use at-risk workers.

Mission: The social purpose of the organization, besides which all else is secondary.

"Money is bad": A time-honored--and tough-to-fight--nonprofit tenet.

Nonprofit stigma: The belief among most private-sector managers that nonprofits are horribly managed.

Recurring revenue: A term that is unknown to the nonprofit world. When an organization's fiscal year ends, the financial odometer returns to zero, and funds have to be raised all over again, without the benefit of market momentum.

Social entrepreneur: A nonprofit-sector leader who attempts to address a social problem using private-sector strategies and tools.

Volunteer: The backbone of many nonprofits. Not an employee, but someone who may do most of the work.

Social Entrepreneurs: A partial roundup

Rubicon Programs Richmond, Calif. Executive director: Rick Aubry

Rubicon provides a range of services to the mentally disabled, homeless, and other economically disadvantaged communities. Like Pioneer Human Services, Rubicon developed revenue-generating businesses as a way to provide jobs for the people it serves, who face barriers to regular employment. Today, the nonprofit grosses $3 million annually from a building-and-grounds company that has won many local contracts, and an upscale bakery that is more than competitive in the local dessert market.

TEDI is a national nonprofit that teaches entrepreneurial skills to low-income, at-risk youths and helps them start and run their own businesses. TEDI has helped revitalize local communities in the process. With sites in six cities, TEDI has reached as many as 15,000 young people. Though TEDI does not run any revenue-generating enterprises, the nonprofit brings in about 30% of its budget from fee-for-service and consulting activities.

Osage Initiatives Denver Executive director: Barry Johnson

Osage Initiatives was created to provide one-stop-shopping employment services for the homeless and unemployed, including child care, job training and placement, housing assistance, and the like. From the beginning, the nonprofit was set up in conjunction with Osage Custom Assembly Inc., a profit-generating enterprise that has provided jobs for more than 1,000 people in the Denver area and has grossed $10 million in sales in a 10-year period.

Pioneer Human Services Seattle President: Gary Mulhair

For more than 30 years, Pioneer Human Services has provided rehabilitation, health care, counseling, housing, and other services to juvenile delinquents, former convicts, substance abusers, and other socially disadvantaged people. More recently, Pioneer has developed a network of enterprises--ranging from a real estate division, to a metal factory, to a wholesale food business--that generates $22 million to $23 million in revenues annually and provides jobs and training for the nonprofit's clients.

When the Larkin Street Youth Center, dedicated to helping homeless and runaway youths get off the streets, decided several years ago to start a business providing jobs for at-risk clients, it set up Juma Ventures as an independent entity. The organization works to mainstream high-risk youths into society by giving them job training and work experience. Through a partnership with Ben & Jerry's, Juma now runs two franchise ice-cream shops, a concession service at Candlestick Park, and an ice-cream-on-wheels catering company. The business currently grosses $900,000 in sales and trains and employs more than 50 youths a year.

Heather McLeod was a founding editor of Who Cares magazine, a publication for and about new leaders in the nonprofit world. She is a freelance writer and consultant.

Resources

Edward Skloot broke new ground with The Nonprofit Entrepreneur (Foundation Center, 800-424-9836, 1988, $19.95). Nonprofits, for reasons ranging from repugnance to reticence, tend to reject Skloot's redefinition of legitimate sources of organizational revenue, but aggressive, businesslike approaches are a nonprofit's salvation. Only if it's financially viable can a nonprofit hope to have impact.

The New Social Entrepreneurs, by Jed Emerson et al, is a compendium of case studies and lessons about for-profits funding nonprofits. For a free copy, write to the Roberts Foundation, P.O. Box 29906, San Francisco, CA 94129. The Roberts Foundation applies private-sector practices to social problems.

Bill Shore's inspirational Revolution of the Heart (Riverhead Books, 212-951-8400, 1995, $19) focuses on Share Our Strength (SOS), the nation's leading antihunger organization, which Shore heads (202-393-2925). SOS recruits the assets and enthusiasm of people and industry, hoping to create a clearinghouse for nonprofits seeking corporate partners. Finally, the National Center for Social Entrepreneurs (612-595-0890) helps nonprofits diversify sources of revenue in profitable ways.